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Tuesday Winners: Legg Mason: More Bullish than its Clients?

Shares of asset manager
Legg Mason (
LM
)
are up +11% today to an 18-month high, after delivering modest
upside to first-quarter forecasts on Monday evening. Shares are
likely getting such a strong boost from an announced restructuring
plan that will take $150 million out of its costs over the next two
years, which should boost per-share profits by about $1. Management
also announced plans to buy back $1 billion in stock, which would
remove about 30 million shares - or 20% of the share count-from the
market. Were those moves to already be in place today, Legg mason
would have announced quarterly per share profits of around $0.69 a
share, rather than the reported $0.39.

And if we annualize that pro forma profit outlook, then shares
would trade for a reasonable 12 times profits, rather than the more
bloated 20 times the actual profit run rate. Whether you find that
pro forma multiple of 12 to be appealing depends on your outlook
for the stock market. Market bulls think this rally can be
sustained, and even if the major indices don't rise much further, a
stable market is likely to help Legg Mason keep rebuilding its
assets under management (
AUM
) as retail investors wade back into the market.

But market bears are quick to note that another market correction
is likely to keep retail investors on the sideline, after the
horrendous results they saw in 2008 and the first half of 2009. And
clients have been taking their money out of Legg Mason's funds for
five straight quarters. AUM only grew in the last year because the
value of the investments rose sharply. AUM would otherwise have
shrunk by $82 million, or about 12%.

If you are bullish on the market, (and that massive $1 billion
buyback should surely assuage some concerns), then you may want to
wait until Legg Mason can at least show that AUM isn't shrinking on
an organic basis. After all, the retail appeal of Legg Mason's
funds is the primary reason for owning this stock.

---------------

The credit cards are starting to come out again. In recent weeks,
retailers that cater to female shoppers have posted strong results,
capped off by this morning's robust sales and profit report from
Maidenform (
MFB
)
, which focuses on women's undergarments. Maidenform noted that
first quarter sales rose 25%, and mid-teens growth for the
remainder of the year looks sustainable. And despite today's +15%
jump in the stock, shares are still reasonably-priced at around 14
times projected 2010 profits.

To be sure, women's apparel is a largely mature industry, and this
kind of growth cannot be sustained over the long-haul. But if
history is any guide, this growth spurt can be sustained as long as
unemployment is dropping. Sure, the formal unemployment rate rose
to 9.9% last month, but that's only because more people are now
starting to look for work. The important stat: 200,000 jobs have
been created, on average, in each of the last four months. And
that's fueling purchases of all kinds of items, such as women's
apparel.

Let this winner ride. Or, wait for a pullback, which is inevitable
in this choppy market. That opportunity has already arisen for
shares of Christopher & Banks, another female-focused retailer.
Shares are off nearly -15% since late April, despite a very bullish
quarterly report.

---------------

We profiled carbon-fiber marker
Zoltek (Nasdaq: ZOLT)
in this article back in February, noting that the company should
see a rebound in demand within a few quarters. Although Zoltek's
first-quarter results once again missed the mark, the company
announced that orders picked up nicely in recent weeks, which
should enable Zoltek to start beating estimates instead of trailing
them. The bullish outlook sent shares up more than +10% in Tuesday
trading.

Carbon fiber, which is more expensive than steel or aluminum, has
always held a great deal of promise, but has often been slow to
find industrial applications. Airplane makers were the first to
embrace the technology, and the auto industry is now ramping up as
a second major new opportunity for the material. Zoltek jumped the
gun and put in way too much manufacturing capacity. If demand is
really picking up, investors should see a great deal of margin
leverage , as all of that overhead is absorbed.

-- David Sterman
Contributor
StreetAuthority

Disclosure: David Sterman does not own shares of any security
mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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